Money Matters

Are High Commissions Pinching Your Profits?

If clients keep pouring money into your salon, but none of it is flowing into your pockets or the salon's coffers, it's time to re-examine your compensation structure. After all, why follow the competition's lead if the road heads toward bankruptcy?

Have you ever heard the story about the Christmas ham? It goes something like this:

It seems that one while preparing her first Christmas ham, a young bride's husband wanted to know why she cut the end off of the ham before cooking it. "Because that's how my mother cooks it she replied. At his request, she called and asked her mother why she did it that way. "Because that's how my mother did it," her mother answered. Still curious, the couple then called and asked her grand-mother, Grandma's simple explanation? "Because I didn't have a roasting pan large enough for a whole ham."

Many traditions, such as family gatherings at Thanksgiving, are to be relished both for the joy they bring as well as the sense of continuity that comes from their repetition.

However, no traditions should be carried on when it is no longer relevant. And this last point, argue many salon owners, applies to the traditional compensation system of a flat commission that's as high as 65% in some areas.

"The commission rates that people consider standard in this industry are from the '50s, '60s, and '70s," notes Neil Ducoff, founder and publisher of Salon Business Strategies and a proponent of salary - or team-based compensation. "These commissions have no basis in the '90s. New salons open and offer a commission rate that's competitive in their marketplace, and they've blown it. Every commission-based industry has adjusted its commissions to match the cost of doing business, except for ours.

"If you base the largest cost of doing business — payroll — on what your competition is doing and the competition never figured out what its own costs are, you fall into the same mess as everyone else. And they're all scratching their head, saying, 'I'm just not making money.'"

Instead, Ducoff asserts, salon owners must analyze their business expenses in terms of cash flow to determine what they can afford to pay, rather than what the marketplace says they must. (After all, what's the point of being competitive with competition that isn't making any money?)

"Pick a normal month of business for your salon as far as sales and expenses," he advises. "Take your total sales and subtract all expenses, including rent, utilities, product cost, insurance, you name it. But don't subtract any payroll costs for yourself, service providers, support personnel, or anyone else. Then subtract a desired net profit: what you want as a bottom line after everyone is paid, including yourself. Ten percent is barely acceptable; 15% is more reasonable. What is left is what your payroll should look like based on your current sales and expenses. A "perfect" compensation system is like a "perfect" marriage: Both exist, but only within the parameters of each unique situation. In other words, one system, like one partner, does not fit all. Here, we talked to a number of successful salon owners who've adopted something other than the traditional flat commission about how they compensate employees, why they chose that structure, and what it's done for their business and their employees.

Whether any one system is better than another is a question best answered by your salon consultant, financial adviser, or accountant. What we found remarkable in each of the structures de tailed here is that the owners examined the problem — standard commission structures that gave their salon no room to grow — and fashioned a compensation solution that allows them to earn a profit above and beyond their own work behind the chair or behind the nail table, to reward their employees for their work in growing the salon, and to reinvest money back into the salon and its employees to ensure continued growth and income for everyone.

"Spiral" System Adam Broderick Image, Ridgefield, Conn.

"The high commission is stupid," asserts owner Adam Broderick, who consults with other salon owners in addition to running his own highly successful salon and spa. Broderick uses what he calls a "spiral" compensation system. "It's very simple," he says. "All service providers work on a commission base of 40%-45%. The exact percentage is based on their technical and customer service skills and pre-set objectives such as attitude, productivity, client retention, and adherence to dress code."

Every six months, employees are evaluated on those objectives, and if they have a good evaluation they receive a commission increase. "When someone gets a price increase, they go back down in commission, but the lower commission at the higher price is still more than what they previously earned," Broderick explains. Then they're given a whole new set of objectives.

"Our retention of nail technicians is very good because we're able to offer them pay increases and they feel challenged because they have very clear parameters and goals to aspire to," he adds.

Broderick's nail technicians also receive educational support and other compensation perks. "For example, our nail technicians just came back from an educational cruise," he notes. Other benefits include a comprehensive training program, profit sharing, ongoing education, a birthday bonus, health insurance subsidiaries, and paid vacations and holidays.

"There are few neighborhood drugstores, video stores, coffee shops, and hardware stores left because they've been eaten up by big business," Broderick adds. "The salon industry has been trickier for big business to figure out, but it's one of the few left to conquer, and that's being done as we speak. This will force a true restructuring of the industry based on a business model that works."

Salary to Commission Hands On, Beverly Hills, Calif.

According to Jim Davis, a managing partner of Hands On, a new salon that's already planning other locations, there are two key elements to a successful salon: teamwork and the opportunity to make a better-than-living-wage. "First, we do a guarantee against what I call productivity per hour" he explains. "We guarantee $10 per hour, which we compute on a weekly average. In other words, if you work six hours today and you generated more than $ 10 per hour but to­morrow you generate less, then it aver­ ages out over the week."

For nail technicians who average more than $10 an hour, Hands On pays a 50% commission on service dollar hours generated if that amount is higher. Additionally, nail technicians earn a 10% commission on retail sales.

"What we want to do is provide an incentive. As their productivity per hour increases by doing our unique service packages instead of the basic services, it allows them to be well-compensated," Davis explains. While 50% commission is too much according to some, Davis argues that the focus should instead be on pricing.

"We've found that the profitability is there," he says. "We just had a meeting a week ago and the staff wanted to raise the prices. This gives them an opportunity to make more money, and I'm astounded the industry feels prices can't be raised. It puts technicians in a very awkward position because they learn that they have to work harder or faster or work more hours. Why would someone want to come into this industry when they're told, 'Here's how much you're going to make for the next 10 years'?

"In other businesses there is always opportunity to increase your income because a company's prices naturally increase. In our industry, we tend to set a price and never raise it, and then we're stuck when the staff leaves to go somewhere else to make more."

In addition to the salary or commission structure, Hands On offers profit sharing, a sliding scale of medical insurance benefits, and vacation time, and Davis says they are working on a 401(k) plan. "We've created an environment where nail technicians can do well," he notes. "We've found that our technicians (and we interviewed more than 100 to choose our final team of 10) want to earn more than $10 an hour."

Guaranteed Salary and Benefits Hidden Oasis, Fairfax Station, Va.

A director focusing on cost management at consulting giant Pricewaterhouse-Coopers, Doug Webster says he initially planned to offer his staff a commission, but after talking to a consultant and many salon owners at The Salon Association's symposium earlier this year, he decided instead to go with a guaranteed salary in his salon that's scheduled to open this month.

"We're hiring people based on their qualifications rather than their clientele, and our basic compensation is salary plus profit sharing," he explains. "To determine the starting wage we consider a combination of what the market offers as well as maintaining an overall wage scale around 40% of the salon's gross sales.

"My wife has been a hairstylist for 18 years, and so many salons seem to operate under the model of 'if you bring in more employees you will automatically get more clients,' he continues. “What she's found, though, is that approach spreads the client base across more employees, and while you may get a 50% or 55% commission, you may not see enough clients in a day to make a wage.”

As owner, Webster says he, not the service provider, is responsible for productivity, and he plans on hiring only enough staff to support the clientele. "We believe we can be competitive in terms of a reasonable wage, and if the business grows and employees contribute to the growth, they'll get a share of the profits," he says. Additionally, Hidden Oasis will pay at least 50% of health insurance premiums and provide five vacation days and four to five paid legal holidays after one year.